Past Experiences and Investment Decisions: Evidence from Real Estate Markets

Abstract

This paper investigates how market participants form risk perspectives through a sequence of information shocks. Guided by a theoretical Bayesian learning model, we exploit a natural experiment afforded by the fracking boom in Pennsylvania in the late-2000s. We empirically examine whether familiarity with historical conventional gas explorations affects home-buyers’ willingness to pay for houses near fracking wells. We find the local real estate market is very efficient with home buyers rapidly collecting and processing market-relevant new information. We also find that buyers discount historical events and rely on current information to estimate the risk of a change in market conditions.

JEL Classification: D, R